Further confirmation that UK families are being crippled by the biggest squeeze on their finances since the 1920s was revealed today, as a major retailer reported the largest ever drop in households' monthly disposable income since the exercise began.

The first regular Income Tracker of 2011, published this morning by supermarket Asda and relating to figures before the impact of the increase in VAT to 20%, showed that in December 2010 family spending power fell by £8 a week – the biggest fall on record. The average family had £172 a week to spend in December, down from £180 this time last year, the new figures show.

At the same time, for 2010 as a whole, average weekly household disposable income was £4 below the average level for 2009 at £178 – a 2.2% decrease.

The decline in family spending power in December 2010 is the largest annual fall since the Asda Income Tracker began in 2007 and spending power fell in annual terms during every month of 2010. When the impact of bonus payments is included in the index, family spending power decreased by £9 over the year to December, a fall of 4.5 %. High transport costs – and the soaring cost of petrol – were factors blamed for eroding disposable income for cash-strapped families in December.

But the main issue behind this downward trend is the disparity between consumer price inflation and sluggish earnings growth, Asda said. Gross incomes (excluding bonuses) grew by 2.3% in December 2010 year-on-year, down from 2.6% in November, while the cost of essential goods and services was 3.9% higher in December 2010 than in December 2009.

Asda calculates family spending power as the amount remaining after the average UK household has had taxes subtracted from income and bought its basic items such as mortgage and utility payments, food, drink and transport – what is left to spend on leisure and recreation goods. It provides a spending power indicator for the average UK household on a monthly basis.

Its latest figures come days after the Bank of England governor, Mervyn King, said families were facing the toughest squeeze on living standards since the 1920s, as a result of the combination of soaring inflation and pay freezes or low pay rises. In his first speech of the year this week, King admitted many households were suffering, saying: "It is hardly surprising that unhappiness describes the reaction of many."

Over the past four years, he added, inflation has ballooned by about 12% but wages have failed to keep up. His warning came after shock figures showed the economy contracted by 0.5 % in the final quarter of 2010, ending 12 months of growth.

Households have also been hit by the cost of food increasing 1.6% between November and December – the biggest rise for this period recorded by the Office for National Statistics (ONS), with sharp increases in the prices of vegetables, bread, cereals, milk, cheese and eggs.

The main factor putting downward pressure on family spending power in December was the transport sector, which was by far the largest contributor to the headline rate of inflation in December with 6.5% annual growth. According to the AA, the cost of unleaded petrol rose by 12.7% in December 2010 year on year, up from 9.6% in November.

The improvements in the jobs market earlier in 2010 were reversed when unemployment rose to 7.9% over the three months to November, versus 7.7% the previous quarter.

Charles Davis, the economist at Cebr which compiled the report for Asda, said: "As this month's Asda income tracker shows, 2010 was a tough year for the consumer. The cost of essential goods and services rose at a faster pace than average wages. The elevated level of inflation in 2010 was mainly driven by the VAT increase in January 2010 and external factors driving up commodity prices: the return to economic growth across the globe pushing up demand and floods and droughts in China, Pakistan and Russia affecting supply. The sluggish wage growth is a result of the slack in the labour market that built up during the recession."

Andy Clarke, president and chief executive officer of Asda, said: "Last year disposable incomes dropped every single month, and 2011 is shaping up to be just as challenging. The cost of living continues to rise at a faster rate than people's earnings, putting a further squeeze on family finances. With government measures to reduce the deficit beginning to bite, it's unlikely there will be any let up soon."

He went on: "It's our job to work with our suppliers to reduce costs and keep our prices as low as possible."